On the very day that she sounded the alarm (Meredith Whitney:  Municipal Bonds Could Collapse), municipal bonds (as measured by the MUB ETF) changed course and have since increased nearly 10% on price alone (not including fund distributions).

"The only function of economic forecasting is to make astrology look respectable."

-- John Kenneth Galbraith

According to a study by Fidelity Investments,

"Participants in 401(k) savings plans who dumped stocks from Oct. 1, 2008, to March 31, 2009, when the Standard & Poor’s 500 Index fell 31 percent, and hadn’t returned to equities as of June 30, 2011, had an average account balance increase of 2 percent, according to the study released today. Those who maintained some equity allocation during that period saw their balances rise 50 percent on average."

And this happens consistently as countless studies have shown that investors returns trail fund returns and fund flows confirm investors predisposition to buy high and sell low.  Sigh.

Read the whole story:  Selling burns 401(k) investors who dumped stocks

The largest gains often occur when they are least expected.

"Consider the case of an investor who found out that he was overconfident of his ability to stand the stress of the kind of bear market we had in 2008. By November 20 of that year, he realized he had overestimated his willingness to take risk. He sold out of stocks with the S&P 500 closing at 752. His plan was to wait until the market had been up for more than 30 days (or when the green flag would be up).

With the S&P 500 closing at 903 at the end of the year (and having missed out on a rally of 20 percent), he buys again, believing that it was now safe to get back in. Unfortunately, the market dropped another 25 percent by March 9 and he had enough. Do you think this investor will ever be able to buy again? And of course, unless he had, he missed the greatest market rally in 70 years. One of the problems with market timing is you have to be right twice, not just once."

If only we had seen it coming, we could have socked our money safely into "bear funds" and made some serious returns over the last decade, right?

Sadly, no.  "Bear funds" were the worst performing funds over the last ten years (down 10% on average) and over the last five years (down 13% on average), according to Morningstar.

Why?  Because market timing doesn't work, "bear funds" are egregiously expensive, and because it's dangerous to bet against capitalism.

I came across an old email (dated February 2009) from a one-time planning client who didn't agree with my investment philosophy (it's very rare that people pay me for my advice and then don't take it but it occasionally happens).

John,

I trust that all is well with you and yours.   

<Names changed> are doing well in <name changed> and just bought a new deck boat.  (Someone has to spend money these days!)

 Are you still recommending the same slice of ETF's, etc.?  

 I have looked at your recommendations several times but have yet to act.  I am still at the same place, thinking the market is going to 5000 or below.  I am still in treasuries and short ETF's with some funds in a bullish US dollar ETF and some in a short of the Austrailian dollar.  They are doing OK.  I am probably going to buy some more of the short ETF's today and some <gold ETF> and <silver ETF>.
 
I think things are much worse than when we first met and we have another few trillion (a lot of boats) of debt with nothing to show for it.
 
I firmly believe in your method of diversification.  However, there is no short side options.  Therefore, I will be watching when to jump in.
 
Come up and go fishing.
 
Regards,  <name changed>

A recent survey of active investors (those trading 36+ times a year) by Fidelity investments indicates that 2/3 of the respondents expect to have better returns than the S&P 500 over the next 12 months.

Some rudimentary arithmetic indicates that only 50% of all market participants can outperform the market (and that's in a world with no investing expenses).

50 chairs, 66 investors, music stops.  Ouch.

Read the whole story:  Investment News/Active investors expect to beat S&P 500 in 2011

Related post:  Illusory Superiority

"The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant, but time and chance happen to them all."
-- Ecclesiastes 9:11